Market Failures, Institutions & Political Economy

The course discusses the general micro-economic theory of market failures and of the institutions to cope with these failures, for example contract law, property rights, competition policy, reputations, trade-marks, credit rating agencies, state monopoly of violence, property rights, democracy, and the constitution. Institutions emerge as an attempt to minimize transaction cost, or equivalently, to internalize externalities.

The course offers a detailed analysis of the basic forms of market failure or transaction cost: asymmetric information (bargaining, moral hazard, adverse selection) and the inability to commit (commitment to future behaviour, commitment to community = free riding). We analyse when markets create the necessary institutions itself (private law) and when political coordination is required (public law). A wide number of practical institutions are discussed, for example social security, competition policy, financial markets, principal agent problems in bureaucracies. The aim is to show that all these market failures and institutions to cope with them can be explained by a small number of mechanisms that show up time and again in different contexts.

The course stresses the links of economics to sociology, law, history, political science, biology and psychology.

Format
•         Lecture
•         Group discussions
•         Weekly assignments
•         Presentations

Assessment method
·         Exam 65%
·         Group presentation 25%
·         Weekly assignment 10%

Real World Perspective
The real world perspective is central to the way the course is taught. It shows how the micro-theory that is set out can explain real world institutions as we observe them in practice like contract law, property rights, competition policy, reputations, trade-marks, credit rating agencies, state monopoly of violence, property rights, democracy, and the constitution, social security, cities, competition policy, financial markets.

The same course is taught in different format as a well-attended post-experience course for civil servants in The Hague involved in practical policy making regarding markets and institutions.

Students fluent in Dutch can listen the podcast College van Kelder & Teulings:
Spotify: College van Kelder en Teulings
Apple podcast: College van Kelder en Teulings op Apple
 
Place of the course within the curriculum
Bachelor year 2, major related elective.